Two reasons the future is looking brighter

28Mar2011

Posted by Andrew Kantor

I’ve been accused of being too negative about the market, and of spinning stories to be overly positive. I consider this a good sign that I’m being a realist. Still, at the risk of being labeled a shill, here’s some potential good news from the future.

First, Fortune says “Real estate: It’s time to buy again.” The reasons? Not only the fact that prices have dropped so much; the big reason for Fortune’s enthusiasm is what it describes as a historic drop in new construction.

Two basic factors are laying the foundation for dramatic recovery in residential real estate. The first is the historic drop in new construction …. The second is a steep decline in prices, on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets.

The piece goes on in much details, including this excerpt:

[I]n the nondistressed cities, the existing home inventory is lower, closer to seven months on average. So a modest increase in demand will translate into strong gains in both prices and new construction. That should happen quickly, because most of those markets — including Silicon Valley, Northern Virginia, and Texas — are now showing good job growth.

But wait, you say, why should you possibly believe Fortune or anyone else predicting the future of the housing market? Pundits and oracles are a dime a dozen. True, but perhaps this piece should be read with a slightly smaller grain of salt. The writer is the same one who, in 2004, wrote this:

The housing market is rapidly losing touch with reality. Fueled by interest rates that have remained near record lows, prices have continued to soar, and the gap between home values and the underlying fundamentals such as personal income and job growth is greater than ever.… Increasingly Americans view houses not primarily as places to live but as foolproof, can’t-lose investments. The passionate faith that money poured into real estate will magically multiply is creating a self-fulfilling speculative frenzy that’s bound to end badly.

(That story was called “Is the Housing Boom Over,” and it ran in September 2004.) Granted, author Shawn Tully got the trigger wrong — he suggested it would start with a rise in interest rates and property taxes — but otherwise he was spot on. “The end of the boom won’t look like a stock market crash, but it could still get pretty ugly,” he wrote, in part because “Americans have used their homes like ATMs, taking out $662 billion in home-equity loans and refinancings since 2001.”

So when Tully says the market is set to rebound soon, he at least deserves an ear. But who’s going to buy? Glad you asked.

The next wave

Wells Fargo has one possible answer: Millennials — aka “Generation Y,” or those folks born between about 1974 and the early 2000s. The company conducted a survey on home buying that found, according to the Des Moines Register, that

people still feel a strong obligation to pay their mortgages, and that “millennials” — people born between 1979 and 2001 — are generally excited about buying homes, said Lisa Zakrajsek, another vice president for Wells Fargo Home Mortgage. There are 6 million more millennials in the prime homebuying age group than there were baby boomers in that age group in 1977.

To clarify that last sentence: Today, there are six million more millennials in their early 30s than there were Boomers in 1977 (when the first of them turned 30).

More than 70% of those surveyed by Wells Fargo still want to own a home. Millennials even responded to more rigorous credit requirements favorably, describing them as beneficial to their goal of remaining in the home once they make the purchase.

(The HW piece is a bit odd. The first four and last five paragraphs are the story; the middle is an odd tangent about mortgage fraud, NAR membership, Realtor earnings, and other stuff. And HW considers millennials to be born between “1979 and 1991,” which is a decade off from the typical definition. But still.)